Industry Updates

UK government mulls regulation of ESG data providers

Data provider discrepancies leave ESG investing vulnerable to greenwashing

Theo Andrew


The UK government is considering bringing environmental, social and governance (ESG) data providers under the regulation of the Financial Conduct Authority (FCA) in a bid to improve transparency and data discrepancy.

In a Treasury report outlining the framework for the UK’s new Sustainable Disclosure Requirements (SDR), published on 18 October, the government said data providers offer assessments that “may not always be comparable” with “more gaps and assumptions” than ratings in other areas of the market, making it susceptible to greenwashing.

The report, Greening Finance: A Roadmap to Sustainable Investing, said ESG rating agencies and data providers must have strong governance in a bid to manage these risks and is therefore considering bringing them under the scope of the FCA.

“It is important that providers deliver ESG data and ratings transparently, and that they have strong governance and management of conflicts of interests,” the report stated.

“The government is therefore considering bringing these firms into the scope of FCA authorisation and regulation. The government will set out further detail next year.”

It comes as the industry undergoes a significant shift into ESG investing with ETFs playing a major role in the sustainable investment boom.

Providers of ESG-related services, such as ratings, data and verification are expected to grow strongly over the next few years and could hit the $1bn mark by the end of 2021, according to data from Optimas, a management consultancy.

The sheer number of ESG rating frameworks – more than 600 according to think tank SustainAbility – makes it difficult for investors to evaluate all of them and leaves the door open to greenwashing issues.

In August, the International Organization of Securities Commissions (IOSCO) issued a consultation with the market to tackle the lack of transparency and consistency underpinning data reporting across different industries and geographies.

The report also outlined the framework for the Sustainable Disclosure Requirements (SDR) which will require every investment product to set out the environmental impact of the activities in finances and justify any sustainability claims it makes.

The regime will look to streamline existing climate reporting requirements, including the UK’s commitment to implement mandatory reporting aligned with the Task Force on Climate-Related Financial Disclosures (TCFD).

Certain large businesses will also be required to set out their green credentials as the government looks to push ahead with its green finance plan ahead of the United Nations COP26 climate summit, set to be held in Glasgow later this month.

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